How Inflation Affects Your Retirement Taxes

When planning for retirement, many people focus on savings and investment returns—but one critical factor that’s often overlooked is inflation. Not only does it erode purchasing power over time, but it can also have a significant impact on your tax liability in retirement.

At Avalon Tax, we believe that a smart retirement plan isn't just about how much you save—it's also about how you protect yourself from rising costs and avoid unnecessary taxes. Let’s take a closer look at how inflation can affect your retirement taxes and what you can do to prepare.

1. Inflation Pushes You Into Higher Tax Brackets

Inflation increases your income, but not necessarily your buying power. For retirees who draw income from Social Security, pensions, annuities, or investment accounts, annual cost-of-living adjustments (COLAs) may bump your total income into a higher tax bracket—even if your actual standard of living hasn’t changed.

While the IRS does adjust tax brackets for inflation each year, the increases may not fully keep pace with real-world expenses, especially in years of high inflation.

💡 Tip: Diversify your income sources between taxable, tax-deferred, and tax-free accounts (like Roth IRAs) to maintain flexibility in how you withdraw funds.

2. More of Your Social Security Could Become Taxable

Inflation can cause more of your Social Security benefits to be taxed, especially since the IRS uses fixed income thresholds to determine how much of your benefits are taxable—and those thresholds haven’t changed since the 1980s.

If inflation increases your total income from other sources (like IRA withdrawals), it could push more of your Social Security benefits into the taxable category.

• For individuals earning more than $25,000, or couples earning more than $32,000, up to 85% of benefits may be taxable.

💡 Tip: Consider delaying Social Security or using Roth conversions early in retirement to reduce future taxable income.

3. Required Minimum Distributions (RMDs) Grow with Inflation

Once you turn age 73 (or 75 under SECURE Act 2.0 for some retirees), the IRS requires you to start taking RMDs from traditional IRAs and 401(k)s—even if you don’t need the money. Because inflation can increase investment balances over time, your RMDs may be larger than expected, triggering higher taxes.

💡 Tip: Start planning in your 60s. Strategic withdrawals or Roth conversions before RMD age can help reduce your tax burden later.

4. Inflation Reduces the Value of Tax Deductions

Many deductions and credits, such as the standard deduction or medical expense deductions, are adjusted for inflation—but they don’t always match the pace of rising costs in housing, healthcare, or insurance premiums.

This means that retirees might find it harder to itemize deductions or qualify for certain tax credits, reducing overall tax efficiency.

5. Real Returns May Be Lower Than They Appear

Your investments might grow on paper, but after adjusting for inflation and taxes, your real return could be much smaller. For example, a 5% return minus 2% inflation and 1.5% in taxes gives you just 1.5% real growth.

💡 Tip: Focus on tax-efficient investing and use strategies like tax-loss harvesting, asset location, and tax-managed funds to improve after-tax returns.

Final Thoughts: Inflation-Resilient Tax Planning Starts Now

Inflation may be beyond your control, but your tax strategy isn’t. A proactive retirement plan that accounts for inflation and tax exposure can help you protect your nest egg and preserve your lifestyle.

At Avalon Tax, we specialize in retirement tax planning tailored to your goals and life stage. Whether you're five years from retirement or already living it, we're here to help you make informed decisions that keep your taxes low and your confidence high.